Dollar rises but market slumps after interest rates left on hold

The Australian dollar has had one of its biggest one-day gains in several months after the Reserve Bank left the cash rate on hold, but hinted that the next move may be up.

The same news sent Australian shares lower in late trade and the market ended up recording its biggest one-day fall since August.

The Reserve Bank surprised no-one leaving the cash rate on hold at 2.5 per cent, but it was the statement by governor Glenn Stevens that caught the market's attention.

He says he would like the cash rate to remain where it is for some time, stating "on present indications, the most prudent course is likely to be a period of stability in interest rates".

He also indicated that inflation was likely to be higher than expected, which has many economists betting on a rate rise or two around the end of the year.

Michael McCarthy from CMC Markets says that is not good news for investors.

"Of course higher interest rates are not seen as supporting share prices," he said.

Around 5pm (AEDT) the dollar was buying 88.66 US cents, more than a cent above where it was before the RBA's announcement.

The share market got off to a poor start after Wall Street dropped sharply overnight on the back of a disappointing US manufacturing report, which saw the S&P 500 drop 2.3 per cent - its worst start to February since 1933.

That led to the All Ordinaries ending down 1.7 per cent, or 88 points, at 5,114, and the ASX 200 lost 1.8 per cent to close at 5,097.

All sectors were sharply lower, with bank, industrial and resource stocks among the worst performed.

BHP Billiton gave up 2.6 per cent, Rio Tinto lost 1.8 per cent, while NAB was the worst of the big four banks, losing 2.4 per cent.

A bright spot on the market were gold stocks; Newcrest rose 4.7 per cent, benefitting from a rise in the gold price as investors turned to the safe-haven metal.

At the close, gold was worth $US1,260 an ounce, West Texas crude was at $US96.40 a barrel and Tapis was worth $US113.50.

On the cross rates the dollar was buying 65.5 euro cents, 54.5 British pence and $1.09 in New Zealand.